HSBC is pressing ahead with building a leveraged finance business, in spite of claims by rivals that it is bulking up just as the market is peaking.

The UK bank created a global leveraged and acquisition finance group last year under the leadership of two dealmakers it recruited from US rival Morgan Stanley. Last September it hired Kevin Adeson and Oliver Duff as global head of leveraged finance and global head of leveraged finance syndication, respectively.

The move, which came after four record years for private equity-led leveraged buyouts, marked a change of direction in the corporate and investment banking strategy that was further underscored last month by Stephen Green, HSBC’s chairman.

On announcing the group’s 2006 final results, he said: “We are building an investment bank that is emerging markets-led and financing focused.”

This meant HSBC concentrated on increasing the volume and size of financial sponsor-driven deal structuring and underwriting it conducts in the European, Asian and US markets.

Deals like this mean HSBC will continue to improve its league table ranking. From ranking 26th as a mandated lead arranger in 2000, HSBC is today ranked 9th, according to data provider Dealogic.

Rivals say it has much to prove to compete effectively with competitors including Royal Bank of Scotland, Credit Suisse and Deutsche Bank.

One leveraged finance banker said: “Adeson and Duff have got their work cut out but they are respected and have powerful relationships, which will help build the sponsor-driven business. It will take time and there are questions over the bank’s long-term commitment to the market.”

HSBC is not alone in its efforts to carve out a greater slice of the lucrative, though highly competitive, global leveraged finance market. BNP Paribas and UBS have also been building their leveraged lending businesses, bringing in teams from rivals or making high-profile appointments to spearhead the push.

HSBC hired Jackie Allen, an experienced leveraged finance banker, from RBS last week as managing director in the European business, reporting to Adeson.

Adeson said: “We purposefully created a flat structure in the business, which means we do not have a European head and can attract good people, focused purely on building a business and originating, structuring and executing deals.”

Allen’s appointment, considered a coup for HSBC, came shortly after it appointed David Simons from Credit Suisse in March to head leveraged finance for Asia-Pacific, based in Hong Kong.

Adeson said the bank will continue to make selective and strategic hires in Europe, Asia-Pacific and in the US, and is keen to point out the bank is taking a “long-term” view on building a business and it will not take the aggressive approach of some of its rivals.

HSBC has yet to announce any detail of its plans in the US leveraged finance market; developing its European and Asia-Pacific operations remain its principal focus.

Adeson, said: “We have great expectations for this business, especially considering the assets HSBC has as far as depth of capital, an understanding of credit and distribution, and a strong geographically diverse presence.

"The opening of the Asia-Pacific leveraged finance market is a big opportunity and one that fits with where we want to take the business.”

HSBC has a tough fight ahead in building a sustainable and profitable leveraged finance business in what Adeson described as one of the most competitive markets.

One of the group’s strengths is the fire power it can provide sponsors targeting large deals.

Adeson said: “We have substantial access to our balance sheet, it gives us significant underwriting capabilities or a capacity that others do not have.

"Having said that, we are a firm that is focused on underwriting and distributing capital. We are not in the business of underwriting and then just loading up the balance sheet with positions.”

HSBC is adamant that it will stand by the leveraged finance division throughout the credit cycle. Adeson said: “A downturn in the market presents a lot of opportunities for us. It is all about how you choose to react and remain competitive.

“If you do not have a long-term view, you end up pulling back from the market, much in the same way that other banks have done.”

Two areas of the leveraged finance business that HSBC has yet to deploy more resources to are distressed debt, or special situations, and restructuring.

Other investment banks and specialist investors have been recruiting in these potentially lucrative areas ahead of an expected downturn over the next 12 to 18 months.

But HSBC has been reluctant to follow, though it will start investing in these areas in the near future to take advantage of opportunities, said Adeson.

“We can use our capital and distribution capabilities to take advantage of these opportunities, and by capital, I mean through principal investment and as underwriter and distributor to other investors,” Adeson said.

Rivals have commented that HSBC has operated conservative lending policy, which if not addressed could restrict the success of the leveraged business.

However, Adeson said there has been substantial shifts on the internal credit side. He said: “Leveraged finance is a natural extension of HSBC’s business. As a firm, we have a long history of understanding credit and HSBC has a better appreciation of complex leveraged structures.”